Employer and Employee Agreement Basics

Employer and Employee Agreement Basics

All employer/employee relationships are based on an agreement. The agreement can be either oral or written and will ideally define the terms of the relationship. It can be as simple as agreeing to pay a part-time bookkeeper to manage your accounts receivables or an extensive salesperson agreement with a complex compensation package.  In any case, as with any agreement, the terms should be in writing and outline the expectations and mutual understanding of the parties, subject to my one exception below.  But, do you need a written contract for the bookkeeper? This blog will talk through the answer to this question and provide guidance on different possible approaches to employer-employee agreements.

Back to Basics

It is common knowledge that written agreements offer numerous advantages over oral agreements. Clients routinely tell me “I know, I should have gotten it in writing.” If it’s generally known that written is better than the spoken word, then why do people, employers included, routinely fail to take such steps?

In my experience that answer is trust. Most people, including myself, want to believe that if someone says they will do something, whether that be the employer or employee, that their word will be honored, and each party will do what was agreed upon.  Another factor, albeit less of a factor, in my opinion, is knowledge of risk. Folks often don’t appreciate risk until something negative occurs. And fortunately for most employers, the risks of a wayward employee or unmet expectations may never be experienced, hence the under-appreciation of the risk. This isn’t to suggest that every employer/employee relationship need be documented in writing. Assessing trust and risk is tricky business. For the bookkeeper working part-time, the risk can be relatively low. And so long as he or she has done a good job for others, the trust factor may be high. But I would limit my exception to these low risk, high trust situations. In all other cases, something in writing is required.

What Type of Agreement

Employers take various approaches to documenting the employer/employee relationship. While employers often dictate how robust an employment agreement is based on employee role and responsibilities and the employer’s business, there is no set rule about what type of document should be used for what type of employee. This leaves employers with a variety of options, from a handshake (previously discouraged) to a full-blown employment contract. There are also some variations between these two extremes that can be useful depending on the circumstance.

Offer Letter

While often differentiated from an employment contract, an offer letter can serve as a contract and an employer’s failure to adhere to the terms in the offer letter, so long as accepted by the employee, can be the basis for a breach of contract action.

Pros

Offer letters provide employers flexibility with relatively little cost. Some offer letters are single-page fill-in-the-blank documents and cover only the most basic terms of employment including position, basic expectations such as work hours and general responsibilities and most importantly compensation. More detailed offer letters can include information on confidentiality, commission structure, or probation period. Often the factor distinguishing an offer letter from an employment contract is an at-will employment clause. Such a clause is intended to reinforce the notion that employment is terminable without cause by the employer or employee and that California’s presumption of at-will employment is not being changed by the terms in the offer letter.

Cons

While not inherent to an offer letter, some employers will use it as a substitute for a more comprehensive employee handbook. Offer letters and handbooks have different purposes and employers who fail to differentiate between the two may find that neither appropriately serves its intended purpose. Information specific to the employee is appropriate for an offer letter. More generally applicable information is best suited for a handbook.

Another issue, again not inherent to an offer letter, but rather how it is drafted, is the risk of creating an employment contract which is not subject to California’s at-will employment presumption. This means that the employee may only be terminated for cause. So how does this happen? No matter how simple, an offer letter might be construed as a contract if the letter refers to employment for a period of time or otherwise gives the employee the impression that the employment is for a period of time. Something as simple as saying continued employment will be evaluated after completion of a probationary period could be construed to mean that employment is guaranteed at least through the end of the probationary period. The best defense for preserving at-will employment in an offer letter is a disclaimer, distinguished from the rest of the letter, that indicates employment is at-will.

Employment Contract

Employment contracts can be used in any industry for any employee but have historically been reserved for managerial or executive positions, or for positions which require significant skill that is particularly valuable to the employer, for example, a highly-specialized salesperson with deep industry knowledge.

Pros

As briefly mentioned above, employment contracts are not subject to California’s at-will employment provisions. This makes sense considering one of the primary purposes of an employment contract is to create a predictable relationship between the employer and employee along with some limitations on how the employer can discharge the employee.

Employment contracts are also a tool for conveying compensation information which for commissioned employees in California must be detailed. During and post-employment restrictions are also frequently conveyed including prohibitions on outside employment and post-employment employee anti-solicitation provisions. Employment contracts are as diverse and comprehensive as the workforce they serve. While legally no different than any other contract, functionally employment contracts serve a unique purpose. They must be crafted with care to avoid unenforceability of the agreement if one or more provisions are found unlawful or against public policy. The same care should be applied to offer letters to avoid the creation of an employment contract.

Cons

Like several things in life, employment contracts can be a blessing or a curse. A problematic employee under contract is exponentially more challenging to manage than an employee who is not for the very reason that employers and employees like employment contracts…the employer can’t be terminated without cause. Cause generally means a fair and honest reason for the termination. For the employee who doesn’t do anything wrong, but who would otherwise be terminated if an at-will employee, an employment contract can be salvation. As a result, employers who wish to hire under an employment contract must be extra vigilant in finding the right employee. Employers can be stuck with the wrong employee until the employee does something that satisfies the definition of good cause under the law or considering the definition of good cause which may, in fact, be outlined in the employment contract.

While at-will has been watered down in California, it remains a powerful tool for employers and employers should be cautious when removing this protection. In determining whether to utilize an employment contract, a foremost consideration for employers is risk, which comes in many forms. One such risk is the inability of employers to attract top talent because there is no promise of continued employment. Employer property may remain more vulnerable as at-will employees may be reluctant to sign robust confidentiality agreements without a promise of something in return, that is employment with termination only upon cause. Employers also control risk by managing the availability of talented employees which can be skewed through extensive use of employee contracts. Finally, employment contracts can define how and where employment disputes will be resolved, subject to some limitations, which can serve as a powerful tool for resolving issues before litigation is necessary.